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Federal Employee Financial Planning: C-O-L-A Cost of Living Adjustment (EP26)

Cost of living adjustment (COLA) is an increase in pay that is related to some measure of economic activity, keeping up with the cost of living. This is often applied to wages, salaries, and/or benefits. In this episode, Michael, Tommy, and John will be discussing the cost of living adjustment for 2023, as well as what this means for your finances and your long-term financial plans.

Listen in as they talk about how cost of living adjustments can impact pensions and whether this is something you should be concerned about if you’re currently living off of your pension. You will learn how to avoid common financial mistakes as a retiree, why every piece of financial advice is not applicable to you, and why you should re-examine your cash strategy right now to make sure you’re getting an effective interest rate.

Listen to the full episode here:

What you will learn:

  • Whether you should be concerned about a cost of living decrease. (5:00)
  • How cost of living adjustments impact pensions. (6:30)
  • Why living on a fixed income is not a bad thing. (10:00)
  • How to avoid making financial mistakes. (18:00)
  • The importance of not bailing on the stock market. (20:00)
  • Why you shouldn’t listen to every piece of financial advice you hear. (23:00)

Ideas worth sharing:

“They’re not talking to you. You are very special.” - Mason & Associates, LLC

“Inflation can really be a risk when it comes to a financial plan, but when you have these cost of living increased pensions, our clients plans get better.” - Mason & Associates, LLC

“Living on a fixed income is not always a bad thing.” - Mason & Associates, LLC    

Resources from this episode:


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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

Michael Mason: Welcome to the Federal Employee Financial Planning Podcast, hosted by Michael Mason, Certified Financial Planner; John Mason, Certified Financial Planner; Tommy Blackburn, Certified Financial Planner, and Certified Public Accountant.

Mason & Associates have over three decades of experience helping federal employees with their financial plan.

This episode, COLA, Cost-of-Living Adjustment, episode 26. It was just announced today the 2023 Cost-of-Living Adjustment. And again, COLA stands for C-O-L-A, Cost-of-Living Adjustment.

Okay, gentlemen, before we dive into the Cost-of-Living Adjustment for 2023, how are you guys doing? You just came back from a pretty interesting conference.

Tommy Blackburn: Doing really well. It's nice to be home. The time change pulls a number on you. We had a blast out there, very excited to have represented our firm. Myself, John and Ben went out and we were presenters, as you well know, Mike. But our audience, our listeners may not know that.

And we were just sharing how we do some things around Mason & Associates and it seems like it was very well received. We had a lot of advisors we connected with asking us for questions. And it was just a good community to be a part of and chat with.

So, was a blast, was a whirlwind and now, we're back in the thick of things. Trying to get everything here done, service all of our clients, get that end of year planning done, which end of year is rapidly approaching.

John Mason: It gets here in no time. I was just thinking, this is episode 26, which is kind of amazing that we just launched the podcast in January of this year. Already this number of episodes, another year going by that fast. My son, Carter's going to be three in November, which is just hard to imagine.

So, the days go by slow, but the years go by fast, and that's never resonated more than it does right now.

And Tommy, to your point, the XY Planning Network, XYPN Live 2022 was such an awesome conference. We connected with folks that we've been doing masterminds with now for two years, some of the thought leaders in the industry — and talking about how we serve our clients in front of other fee only financial planners, really make a neat opportunity.

And we have a history of being in the broker-dealer community where that's where you and Ken started. Now, we're in this fee-only RIA community.

And one of the interesting things that Alan Moore (one of the founders), said at the conference was, “There's no kids' table at this conference.” And what he meant by that is John, Tommy, Ben, you're the same age as everybody else, which was completely different than how it was before.

Michael Mason: Right, right. And I know you guys did a wonderful job because it was live streamed. And Bobby and I, of course, we were fortunate enough to have our grandson, your son, John Carter for seven days. We're still recovering from that, but it was great experience.

John Mason: Good luck. It's probably going to take about a month for you guys to fully recover. This morning, I think we got up at 5:00, and talk about whiplash. You get back from a nice relaxing vacation, then you get thrown right back into it.

So, let's dive in. Cost-of-Living Adjustments 2023. There's a lot to unpack here. We're going to talk about a variety of things, how it impacts your financial plan, what exactly is a COLA? We're going to try and relate this to a couple different folks.

So, we want to speak directly to the federal employee who received a COLA. We want to speak to the active federal employee who is going to get a pay raise, but maybe not to the same effect. Retirees on Social Security where that's all of their income, and they're okay with that, and they have expenses that are less.

As well as those retirees, guys, who maybe don't have a Cost-of-Living Adjusted pension, or their retirement needs are so high that they're actively pulling from their investments. So, a lot to unpack in this episode.

Michael Mason: Yeah. And we don't want to miss the FERS employees that have retired under age 62. I should say the FERS retirees because if you retired two years ago, you may have missed the two of the biggest pay raises.

And the other thing I wanted to say (and it's a favorite of mine), the government always calls it a COLA, Cost-of-Living Adjustment. In reality, it's a COLI (C-O-L-I) because your benefits are only increased. Even in periods of negative inflation, you've never seen Social Security reduced or a CSRS or a FERS benefit reduced. So, it's a COLI, Cost-of-Living Increase, not a Cost-of-Living Adjustment.

Tommy Blackburn: And so, do we want to now go into what the actual COLA, Cost-of-Living Adjustment amounts are. So, these were just announced and we're recording this in the middle of October of 2022.

For 2023, it's going to be military CSRS getting 8.7% and FERS is going to get that 7.7%. So, because we're over that three, they get inflation. That inflation reading minus one gets us to that 7.7.

John Mason: And Social Security recipients, I think are also going to be that 8.7%. And then I'm 99% confident the VA disability payments (if you're receiving), that's also going to go up by 8.7.

And so, if you think about that, we have a lot of clients retired FERS, retired military, receiving Social Security, and a VA disability. All of those received at least 7.7 with three or four of those getting maybe 8.7.

Tommy Blackburn: And that's on the back of a … we were just talking about it, Mike, a 5.9% increase, I think is what Social Security, which would be true for pretty much all of these minus one for FERS last year. So, two substantial increases now.

And as we'll get into in this episode, we joke about there's all these stress tests we do in our financial planning with our clients. And one of them is what if inflation goes high, and what if it's running at these high levels for how long.

And many people, as John alluded to, that don't have those Costs-Of-Living Adjusted pensions or they're having to rely on their investments, inflation can really be of risk within a financial plan.

But when you have these Cost-of-Living increased pensions that we're talking about, our clients' plans get better because, as we'll get into, not all of their expenses are going up at that same rate, but their pension gets that headline increase.

Michael Mason: Yeah. It's really kind of interesting and scary at the same time. I did the math, if you were on the high end of that, 14.6%, let's just call it 15% between ‘22 and ‘23 pay raises, or 14% if you're in the FERS system — still pretty hefty pay raises.

On a $100,000 between Social Security and maybe a FERS pension or Social Security and a military, that's a $15,000 a year increase.

Tommy Blackburn: And then here in Virginia, our retired military over age 55, now get some of that pay tax free. It's 10,000 this year and goes up to 40. So, even more of a win if you're in that situation.

Michael Mason: Well, yeah. And then none of your Social Security in Virginia is taxed. I think it's 26 states in the District of Columbia. So, here you have 15% pay raise over a two-year period and no taxes to offset that.

And then to compare that, and that's why we have this statement we've used (and if you've listened to these episodes), you're a millionaire in your defined benefit pension plan like one. What if you're a Huntington Ingalls retiree that doesn't get a pay raise?

And let's say you were at the high-end of that Huntington Ingalls and you were making a hundred grand. Well, now, your a hundred grand feels like 85,000. If Uncle Sam has this inflation right, you just had effectively a 15% pay cut.

So, we speak to the federal and many of our federal military, we want you to know that it's a pretty good deal out there. And John, one of the reasons we want them to know that, is not to freak out over what's happening in the stock market.

John Mason: Well, you guys hit on so much good information, I don't even know where to go next other than some thoughts that are coming to my mind is not only did you receive a 15% pay raise, it's a pay raise that you never have to give back.

So, stock market returns, market goes up, it goes down, you get some, you give some. These pay raises, because there's never an adjustment downward, they're locked in. It's like locking in your high day and next year it's going to grow again. It's pretty amazing.

And I know we're going to dive into all these other things, but want to get this off the table early, guys. Living on a fixed income is not a bad thing. And we know we talk about this in our office, most of our clients have been on a fixed income their entire life.

If they were an active federal employee, they had a salary, that was a fixed income. If they were a business owner, they probably saved, they probably budgeted for those worst years. They basically lived on a fixed income.

Transitioning from retirement fixed income from active employee fixed income is not a bad thing. And here's why, it looks like (I was reading this today), President Biden's plan, I believe, is that active federal employees will receive about, on average, 4.6% pay raise going into 2023.

So, that's a little bit of a pay raise and also a locality adjustment. That's basically half. So, active people getting up and going to work every day are going to receive a 4 to 4.5% increase versus retirees, we're talking on average 8%.

Michael Mason: Right. And you'll probably look at those at your FEHB during open season next month and you won't see it go down, so your health insurance is going to go up. But if you're retired, your pay went up over two years, 15%, guess what Medicare is going down next year.

And if you're retired and your house isn't paid off, well, by golly, it's on a fixed monthly payment probably less than 4%. So, that a $100,000 family just got a 15,000 pay raise over the last two years. That $1,250 a month could be making your entire mortgage payment if you still have one, and if you don't have one, then it's just gravy.

Tommy Blackburn: Exactly. And I know we talk about this too as we help clients think about this. If they have a mortgage that was existing, we most likely refinanced it down to historically low rates, probably 3% or less, easily 4% or less.

And as we look at that and we now watch what I bonds are paying, banks are raising their rates. I think on money market funds, you may be able to get almost 3% at this point, is what we're looking at.

So, as rates are coming up and you locked in those extremely low mortgage rates and your pension is getting these high inflation adjustments, don't pay it off.

And we've even told clients — I know I had this conversation, and I think you guys have as well recently, is, “They should be offering to pay you off, to buy you out of that mortgage at this point. Do not do them a favor and get that thing off the books.”

I mean, they are losing money on that mortgage. So, in those situations we can see carrying the mortgage. Clearly things change over time, that may not always be true.

John Mason: Maybe we can summarize this section and then move into some additional talking points here. Is that Cost-of-Living Adjustments for federal employees, those on Social Security are outpacing on average, at least what federal employees are set to receive next year who are actively working.

And headline inflation is high. I don't know what it is. It's a big number and you read it and you're like, “Oh my gosh, chicken's up 27%, gas is up, whatever, it's up.” And you hear these big numbers, Mike. Big, big numbers. And that's what resonates in people's mind.

But what's important to remember is big adjustments on small numbers versus medium size adjustments on large numbers, large numbers being your pension and small numbers being your expenses. You have more discretionary income going into 2023 than you did in ’22, than you did in ’21, if you're a retired federal employee. Caveat, if you are over age 62.

Nobody's talking about this. The folks who are really getting harmed here are the ones that retired from FERS at 57, 58, and 59. All of their peers, just because they're older, received a 15% increase on their benefits. I guess, that's not fair. So, about 13.

They never get that back. It is physically impossible for those folks to catch up. So, those are the ones who've been really impacted by this. The other folks are winning.

Tommy Blackburn: However, I suppose the silver lining there, is yes, they are losing, they'll never get this back, these inflation increases.

But once they get to that magic age, they will then begin getting those inflation adjustments. So, it is unfortunate, but it's not a forever, you'll never get inflation. You just have to get to that point in time.

John, one thing you mentioned that I thought was interesting and wanted to maybe put some more to, is you talked about percentages. Percentages on a small amount, percentages on a bigger number.

And it's confusing for people. Percentages are very helpful as we think about things, but sometimes, we have to translate them. So, sometimes I think what we want to talk about, well, let's change it to dollars. So, a CNBC, I think, study said on average an American family is spending 3,600. Does that sound right, Mike?

Michael Mason: Yep.

Tommy Blackburn: About 3,600 more per year right now. So, forget the percentage. And let's put it in dollar terms. When we apply these percentages on the pension increases, I think we're coming up with easily 5 or $6,000 more. If it's a $100,000 pension that got an 8.7, I mean, or a 7.7, you're at 7 or 8,000 more.

So, that's why too, just sometimes trying not to get your mind wrapped up or tricked on converting percentages to dollars. Sometimes, it's a good exercise.

Michael Mason: Yeah. I'll take a 10% increase in my fuel bill every year if you give me an 8.7% increase in my salary every year. You have 200,000, a $100,000 salary, give me 8.7 and my fuel bill's 5,000 a year. We'll take it every year.

Here's a funny thing that again, I want to hit it hard because I can. I'm 61-years-old, maybe I'm already in this group and don't know it but-

John Mason: The free coffee group?

Michael Mason: The free coffee group. We laugh about it locally. Get your military discount, get your old person discount, your senior citizen discount. These advertisers know what we already know.

They're advertising to the people that have the money. They're not giving away a free coffee because they've got coffee to give away. They're giving away a free coffee because they want you to buy breakfast. They're giving you a discount at the auto store because they want you to buy the automobile. They're advertising the people with money.

So, just understand you're in a pretty good spot when you're 65-years-old on Medicare, Social Security, throw in a military of federal benefit. You're not affected by this inflation.

And I'll make this last statement, shut up, let the boys talk; is your biggest bills are typically locked in anyhow. Your car payments, your house payment, if you have them, they're typically locked in at the old rate while your pay goes up.

Tommy Blackburn: Which is why we were trying to be so active when we had the low rates to go ahead and lock those in, do those no cost refinances while the getting was good. Take advantage of the music that's being played.

One thing is we've talked about these increases in these pensions that I've been thinking about and I know you guys have or will, is we talk about when we present plans to clients, we say, “And this balance sheet doesn't even include the value of your pension. And if we were to assign a value to it, to replicate that income stream, divide it by 3.5, 4%, some type of reasonable withdrawal rate and we get to a multimillion dollar figure.”

Well, if we're going to reassess that now, saying, “Yes, your investment accounts, the markets they've not been pleasant this year, they've come down, but that Cost-of-Living Adjustment you got — if we now assign that to your balance sheet, we probably just picked up a few hundred thousand dollars just to replicate that increased income you have.”

Michael Mason: Yeah. And guys, I think it's crucial to bring this back to financial planning. Why we spend so much time helping you as federal employees understand how good you have it, is because if you understand that you're a millionaire in that defined benefit pension, you won't make mistakes. If you think you're underpaid and you think you're being hammered, that's when you make mistakes.

So, one of the biggest mistakes is you retired two years ago and you turned down survivor benefits. And let's say you're a $100,000 CSRS retiree and you turn down survivor benefits — well, your pay’s now 115,000.

Whatever life insurance you bought to protect your spouse. Hopefully, you do love that spouse and you did something to help him or her. If you bought life insurance, guess what? The life insurance didn't go up 15% and you probably didn't buy enough of that in the first place.

So, the reason we spend this time explaining how good your benefits are, is so that you don't make mistakes inside there.

John Mason: Well, we want to educate, right, Mike? And empower our clients to make really educated and informed decisions around things like survivor benefits, around things like stock markets and investment portfolios.

And people make their own decision because it's scary. It's scary to go into retirement, it's scary to think about, “Is my pay dropping and now, I have to pay 8.5 to 10% for survivor benefits?” So, thinking about all of these costs can be very overwhelming.

And what you said earlier really resonated with me, which is knowing that we know the score of the game prevents us from making bad mistakes. So, that could also be bailing out of the stock market right now.

Tommy Blackburn: Exactly what I was thinking.

John Mason: Bailing out of the stock market because you think that your TSP or your IRA is super important when in reality you've been retired for five years and have never touched it because your guaranteed income exceeds your expenses plus some.

That's where I think we're able to add the value is like putting clarity, empowering clients to make really educated and informed decisions. Navigating headline risk, which is inflation, navigating stock market drops like we've seen this year, and just being able to sift through all that noise is a value that I don't think many folks can get unless they're working with a team or professional like Mason.

Tommy Blackburn: Absolutely, John. What a great point. And I just want to elaborate a little bit further as I think about it. The clients we work with, again, the federal employees, military who have these great Cost-of-Living adjusted pensions, and we think about the investment strategy, it's really where we want to try to drive home how good you have it, how your situation is probably improving, so that we don't make an emotional decision on our investment strategy.

We understand it's painful to watch, no one enjoys it. But when we look at history over a long period; 10, 20 years, 30 years, history has shown it's going to work, and you're going to have these up and downs that make you excited and make you want to jump out.

But when you have such great guaranteed income, you've built such a good situation, you are in the position to let the strategy work.

So, that's where we really want to educate. That's why I'm coming back to the education piece. We just want to help you see … stick with the strategy, the plan is in great shape.

John Mason: And our clients’ financial plans, we reviewed, met with all of our clients between April and May. I don't think we had to adjust anybody's financial plan because the drop that had occurred in the stock market between January and April had derailed anybody to a probability of success that we felt uncomfortable with.

Tommy Blackburn: I think that's correct. I'd be surprised if that's not absolutely true.

John Mason: So, what that means is the financial plan was built to weather this storm. The portfolio that was picked for our clients was designed to weather this storm. Hopefully, our audience has something similar.

And one other just thing to think about as we talk about markets and portfolios, at XY Planning Network Conference, somebody said to me, “John, if somebody has a 30 or $40,000 pension, isn't that like having a million dollars in a bond portfolio?”

I was like, “Well, I guess you're kind of right. I mean, it's paying a coupon payment, it's guaranteed income, like that is safe.” And the person was thinking, “Well, then let's put all of their TSP in stocks because they have all this great guaranteed income.”

What we come back to at Mason & Associates is, emotionally behavioral finance, we don't dive a ton into that, but that's probably not going to work out so well for most federal employees to be a 100% stock.

But what do we say all the time? Our clients have the ability to choose their investment experience. Super conservative, moderately aggressive or aggressive, and anything in between. Why?

Because they have the income between pensions and Social Security that they get to design their investment experience so they can hold the line during difficult times.

Folks in the private sector, we look at them on paper and we have to say, “Hey guys-

Tommy Blackburn: This is what you have to do.

John Mason: We need to do this because if we don't, your plan will not succeed. Try, try again.” So, this is a different experience for federal employees. So, we just wanted that to resonate. Two other thoughts and then we're going to dive into action items.

Mike, I think you and Ken created both of these probably back in the ‘90s sometime, but two of our favorite sayings; one, for our listeners to remember, they are not talking to …

Michael Mason: You.

John Mason: And you are very …

Michael Mason: Special.

John Mason: So, they are not talking to you and you are very special. So, our federal employees, our military, our state, folks with guaranteed income, that is Cost-of-Living adjusted, there's a bunch of noise out there.

All the talking heads are marketing to folks who do not have defined benefit pensions and especially folks who don't have defined benefit pensions that have a Cost-of-Living Adjustment.

So, the news, the advice, the stuff you're hearing out there is not applicable to you and your financial plan. Seek out a firm like Mason & Associates or another firm who specializes with you to help you navigate this stuff.

So, boys, let's dive into some action items here. Tommy, why don't you start us off?

Tommy Blackburn: Well, the one that's easiest, other than what you've hit on so far, is I bonds or Series I bonds. You can still … well, the time you hear this recording, it won't be the case, but currently, we're at that 9.62%. November, that's probably going to go down to six or seven.

That's still a great rate of return on essentially cash. So, check those out if you've got some cash in you to put to work. And really, I would say reexamine your entire cash strategy right now. What are you earning in the bank? What offers are out there? CDs, maybe even look at T-Bills, money market. Make sure you're getting an effective interest rate on that cash you have.

Michael Mason: That good financial plan, we've encouraged many folks, FERS, to take their FERS benefit, delay Social Security. Guys, I was thinking about this as you were talking.

If you've delayed Social Security from 67 to 69 over the last two years, that's a built in 8% increase for both of those years. That's 16% and the combined COLA is 31. That's a pretty good deal right there.

One other thing I wanted to add, episode 18, John, is that They Are Not Talking To You. So, folks tune into episode 18. You're going to get a long-term care. If you own federal long-term care, you're going to get an increase.

The reason why we have these podcasts and this education is to say, “Your income went up 15% over the last two years. Don't freak out if your long-term care bill goes up 5, 6, 7, even 10% on a $3,000 bill. Keep that long-term care insurance.”

John Mason: Well, the final action item for this episode for Mason & Associates is we're going to go into end of year financial planning and tax planning. And then as we begin strategic planning meeting season, guys, next year, which will be in April and May, I think one of the things that we need to hold fast to is our clients are going to be in good shape, we know that.

But next year, our goal needs to be to help our clients begin spending some of this money. It's still, I think, a passion for all of us. Our clients have worked so hard; 30, 40 year careers and then they get to retirement. And we try our best to convince them that it's okay to spend some of the money that they've saved.

So, going into 2023, we hope that our clients, if they do have more discretionary income, will do more camping trips, do more vacations. Maybe when the market rebounds, they'll spend a little bit more of TSP, enjoy the fruits of their labor.

So, I think that's the action item for us, is that we know that we can help our clients enjoy things a little bit better next year.

Michael Mason: Yeah, turn left. Your airplane ticket went up, your trip went up. You've been saving for it your entire career — you can still get on that plane and turn left after listening to this episode, I hope.

John Mason: Folks, this has been another episode of the Federal Employee Financial Planning Podcast, episode 26.

Connect with us, Mason & Associates. Were on Facebook, we're on LinkedIn. Our website is

And if there's any comments or questions or episode topics that you'd like to hear about in the future, you can send those our way @masonfp, like Mason Financial Planning —

Thank you so much for sharing this podcast with your friends, your coworkers, for being with us on this journey. It's been a heck of a year. 26 episodes already in, podcast growing and we are loving connecting with federal employees across the country.

Thank you for everything you do for Mason & Associates.

The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.

We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.